Once the Atmel ATmega328 has been programmed for photosensor and servo for example, can it then be removed from the board and hidden in a piece of art (wiring power, sensor and servo of course?)
In addition to power for the ATMega328, sensors, and servos, you'll need a voltage regulator circuit, and a crystal and some capacitors (to regulate timing).
It might be easier to use an Arduino Pro Mini: http://www.sparkfun.com/commerce/product_info.php?products_id=9218
Same capabilities as the Duemilanove, but smaller.
For further information see:- http://www.arduino.cc/en/Main/Standalone